Tenant Retention & Lease Incentives

Tenant retention and lease incentives address the commercial mechanisms landlords and their managing agents use to secure new tenants and retain existing ones at commercial and retail premises. Because a vacant tenancy generates no income while continuing to incur outgoings and holding costs, and because re-letting a premises involves agent fees, fitout costs and a further period of downtime, landlords routinely offer incentives to secure a lease commitment or induce an existing tenant to renew rather than vacate at expiry.

Incentives take several common forms, including rent-free periods at the start of a lease term, cash or fitout contributions toward a tenant’s shop or office fitout, rent abatements during a fitout period, and early lease break rights offered in exchange for a longer committed term. The scale and structure of incentive offered varies with prevailing vacancy rates, the strength of the tenant’s covenant, the length of lease term sought, and the relative bargaining position of landlord and tenant in a given market and location.

Because incentives reduce the net rent a landlord actually receives without altering the face rent recorded in the lease, they materially affect the calculation of effective rent, the assessment of covenant risk, and the valuation of an income-producing asset. Practitioners assessing a commercial property’s income profile must distinguish face rent from effective rent, and understand how incentive amortisation is treated in a landlord’s financial accounts, in order to form an accurate view of an asset’s underlying performance.

This node covers:

• The negotiation, structuring and financial treatment of tenant incentives at commercial and retail premises
• Retention strategies landlords and managing agents deploy to reduce vacancy risk at lease expiry, including early renewal engagement, renewal incentive offers and lease restructuring

This node does not cover:

• The drafting of the underlying lease instrument → refer to Node 34210
• The recovery of outgoings from tenants → refer to Node 34220
• The physical management of the building in which an incentivised tenancy sits → refer to Node 34240
• Incentive practice in residential tenancies, which is materially less common and not subject to the same accounting treatment

• AASB 16 Leases

  Australian Accounting Standards Board

  The Australian Accounting Standard governing lease accounting for both lessors and lessees, including the amortisation of lease incentives over the lease term and their effect on recognised rental income and right-of-use asset values.
• Retail Leases Act 1994 (NSW) and equivalent state and territory retail tenancy legislation

  Relevant state small business commissioner or fair trading agency

  Requires disclosure of incentives forming part of the bargain for a retail shop lease in the landlord’s disclosure statement in most jurisdictions, and imposes minimum lease term and cooling-off obligations that interact with incentive negotiation.
• Australian Consumer Law (Cth)

  Australian Competition and Consumer Commission

  As applied through the Competition and Consumer Act 2010 (Cth), prohibits misleading or deceptive conduct in representations made about the value or terms of an incentive during lease negotiation.
• Corporations Act 2001 (Cth)

  Australian Securities and Investments Commission

  Governs the financial reporting obligations of listed landlords, real estate investment trusts and managed investment schemes in respect of incentive assets, liabilities and amortisation disclosed in their financial statements.

In practice, incentive negotiation typically begins once a prospective tenant has indicated in-principle interest in a premises, with the landlord’s agent preparing an incentive offer calibrated to current vacancy conditions, the tenant’s covenant strength and the length of lease term sought. The agreed incentive is then documented, either within the lease itself or in a separate incentive deed, and amortised over the lease term for financial reporting purposes.

Retention strategy typically begins well before lease expiry, with property managers identifying expiring tenancies and assessing the relative cost of retention incentives against the holding costs, re-letting costs and downtime risk associated with the tenant vacating. Landlords generally prefer to retain a performing tenant at a moderate incentive cost rather than incur the combined cost of vacancy, re-letting fees and a new fitout contribution to secure a replacement tenant.